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Oct. 31 — Kansas's recent budget problems have proven that Republican beliefs about the ability
of tax cuts to goose the economy and fill government coffers are misguided, according
to Democrats.

The state government, seeming to underscore the problem, recently stopped issuing
a
quarterly report on its economy that was originally intended to track an expected growth spurt after
taxes were cut.

Kansas is not the only state where a Republican governor and statehouse face budget
problems. Energy-producing states like Oklahoma and North Dakota, hit hard by the
falling price of oil, have also had to make cutbacks. But an analysis by Bloomberg
BNA of state-level budget data found that Republican-run states are, in general, in
better budget shape than their Democrat-controlled counterparts.

Those states are more likely to have higher balances in reserve funds, higher ratings
by credit agencies and less in long-term liabilities. The only measure where Democratic
states do better is on their credit outlooks. Republican states are more likely to
have been given a negative assessment of their near-term fiscal prospects.

‘Tired of Divided Government.’

While it is true that state economies and finances can be influenced by larger national
and regional economic events, the strength of Republican state balance sheets gives
the national GOP potential political ammunition. Republican leaders have made the
argument this year that if they were given control over Congress and the White House,
they could make progress on important issues, including the budget.

“I’m tired of divided government. It doesn’t work very well,” House Speaker Paul Ryan
(R-Wis.)
said Sept. 29. “We’ve gotten some good things done. But the big things—poverty, the
debt crisis, the economy, health care—these things are stuck in divided government.
That’s why we think a unified Republican government’s the way to go.”

According to the bipartisan National Conference of State Legislatures, there are 22
states where Republicans hold the governor’s mansion as well as both chambers of the
legislature. In contrast, Democrats enjoy the same situation in only eight states.

The Republican states run the gamut from sparsely populated ones like Wyoming and
Idaho to more populous ones like Ohio and Michigan. They also include Alabama, Arizona,
Arkansas, Florida, Georgia, Indiana, Kansas, Mississippi, Nevada, North Carolina,
North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah and Wisconsin.
The Democratic states are clustered mainly along the coasts: California, Connecticut,
Delaware, Hawaii, New York, Oregon, Rhode Island and Vermont.

GOP States More Creditworthy

The Bloomberg BNA analysis looked at a variety of indicators of fiscal health, including:

state general obligation bond and issuer ratings given by credit ratings agencies;

There are caveats to the data, of course. For one thing, it is unclear how much policies
put in place by state government can change that state’s circumstances.

In addition, the results of policies can take a long time to play out. Barb Rosewicz,
research director at the Pew Charitable Trusts, said an example of that is pension
liabilities, which are the biggest long-term liability in 37 of the 50 states.

“That, again, is a consequence of decisions that have been made over a generation
or more,” she said.

John Hicks, executive director with the nonpartisan National Association of State
Budget Officers (NASBO), echoed that sentiment. “Some of the things you’re looking
at take years to create,” he said.

Still, on most measures of budget balance examined by Bloomberg BNA, the Republican-controlled
states came out ahead.

The average rating for a GOP-controlled state was better under all three major credit
ratings agencies—Moody’s Investors Service, Standard & Poor’s and Fitch Ratings—than
the average Democrat-controlled state as of the end of August.

Converting the conventional range of ratings, from “A” to “AAA,” to numerical values
by assigning a point for each “A,” the average Republican state had a rating equivalent
to 2.35 with Moody’s, or slightly better than a “AA” rating. In comparison, the average
Moody’s rating for a Democratic state was 2.25. For Standard &
Poor’s, the difference was slightly more pronounced, with a GOP average of 2.41 compared
to a Democratic average of 2.13.

For Fitch, the average Republican state was even better, at 2.53, equivalent to two-and-a-half
“A”s out of a possible three, while the Democratic states’ average was 2.25. Fitch
does not provide ratings coverage of some Republican states that Moody’s and Standard
& Poor’s rated as only “AA” states, such as Arizona and Kansas, which likely helped
bring up the Republican average.

‘Rainy Day’ Funds Higher

In terms of reserve “rainy day”
cash to help Republican states through an economic downturn, on average they had about
twice as much on hand as their Democratic counterparts, according to data compiled
by NASBO.

The Republican state average reserve fund totaled 9.13 percent of annual expenditures,
compared to 4.53 percent for Democratic states, according to NASBO’s latest
“Fiscal Survey of the States,” a report on state budget trends and data issued twice a year. The NASBO data were
the states’
estimates for their 2016 fiscal years and part of the survey released June 21.

For all 50 states, the rainy day total fell between the average of the two parties’
figures, at 6.5 percent.

The Republican states’ percentages were driven up by three outliers—Wyoming, Texas
and North Dakota—states that rely heavily on energy production but also have to deal
with its attendant price volatility. Wyoming had the highest “rainy day” reserve percentage,
at 54.5 percent of annual spending, while Texas had the next highest percentage, at
18.1 percent, followed by North Dakota, at 15.7 percent. Even without those states,
though, the GOP state “rainy day” average was a higher 5.3 percent of annual spending.

Unlike any of the Democratic states, some Republican states reported having nothing
in the way of “rainy day”
reserves. They included Arkansas, Kansas and Nevada.

Less Long-Term Liabilities

When it came to long-term liabilities, the picture was similar. The Pew Charitable
Trusts in its
“Fiscal 50” analysis compiles state data on the amount of liabilities states owe. By adding those
liabilities—pension, retiree health-care costs and debt—and dividing by the state’s
personal income—the sum total of residents’ wages and salaries and other forms of
income—Pew came up with a percentage meant to measure states’ long-term fiscal health.

As with “rainy day” reserves, Republican states’ balance sheets again proved healthier
than the average and much healthier than Democratic states. The Republican state average
of liabilities to state income was 10.1 percent, less than half of the Democratic
states’ 20.8 percent. For all 50 states, the figure was 14.8 percent.

In Republican states, the long-term liability percentage ranged from a high of 21.1
percent in Mississippi to a low of 1.1 percent in South Dakota.

For Democratic states, the range was from Hawaii’s 46.1 percent to Oregon’s 6.7 percent.
Oregon was the only one of the eight Democratic-controlled states with its percentage
in single digits, while 12 of the 22 GOP states held that distinction.

‘Pro-Growth, Pro-Jobs.’

The one indicator where Democratic states fared better than their Republican counterparts
was in credit rating agencies’ outlooks. When agencies rate state-issued debt or assign
the state an underlying rating, they often also include their opinion on what the
next change in rating will likely be, whether negative, positive or simply unlikely
to change soon.

In the Moody’s ratings, three of the 22 GOP states—Kansas, North Dakota and Oklahoma—had
negative outlooks in late August. In comparison, only one Democratic state, Connecticut,
had a negative outlook.

The story was similar for the Standard &
Poor’s ratings. There, Oklahoma and Wyoming had negative outlooks, while no Democratic-controlled
states had a negative outlook.

It is no surprise GOP-led states did better fiscally, said Jon Thompson, communications
director with the Republican Governors Association.

“Governors can absolutely have an impact on the economic success of the states, and
I think you see states with Republican governors succeeding financially because they
champion pro-growth, pro-jobs policies, focused on making their states strong engines
of economic growth and fiscally sound,” he said.

A request for comment to the Democratic Governors Association was not returned.

Divided Government Is a Push

How much budgetary credit should go to policy—instead of a state’s underlying economic
fundamentals or the national economy—is subject to debate.

“I think that state economic development policies over the long term can have a positive
effect, but in the near- and mid-term, federal macroeconomic policy is pretty much
what has more of an influence on shaping the economic environment across regions and
states,” said Kil Huh, senior director with Pew.

Hicks, with NASBO, said in some cases there is a bipartisan consensus in states on
fiscal matters, no matter which party happens to be in charge. “Political culture
is certainly an underlying element,” he said. “You tend to get some continuity in
broad approaches, whether Democrats or Republicans.”

Notably, states with divided control may have an advantage in getting to a budget
peace. Unlike the federal government, 49 of the 50 states have a constitutional balanced
budget requirement.

That, according to Pew’s Rosewicz, imparts a sense of a shared mission among state
lawmakers.

“It creates a different dynamic in which there is a problem-solving kind of attitude
and that they need to accomplish this by the end of the year. That doesn’t mean that
it’s easy, but when you just look at totally Republican and totally Democratic states,
you’re kind of missing that dynamic,”
she said.

Generalizations about states’ approaches to the budget can be oversimplified, Rosewicz
said. While Kansas has cut taxes and has had budget problems, she said Nevada, also
under Republican control, raised tobacco and business taxes in 2015. “I think you’d
be able to point to examples on both sides. These states are unique and have long
traditions,” she said.

To contact the reporter on this story: Jonathan Nicholson in Washington at
jnicholson@bna.com

To contact the editor responsible for this story:
Paul Hendrie at
pHendrie@bna.com

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